Support sector hit by RSPT

Companies that offer services to the mining sector – drilling, transport, construction and processing facilities – have had their share prices hit hard in past weeks, partly as a consequence of the government’s proposed resource super profits tax.

That means there may be some bargains available to investors – but they need to choose carefully, analysts say, because the sector covers a wide range of activities. It includes companies solely dependent on Australian business and others with diversified interests with overseas sources of revenue. Diversified groups, especially those with international activities, will be least affected by the tax since they are not totally reliant on Australian mining for their income.

CMC Markets analyst James Foulsham says: “If you look at the numbers, a lot of stocks have been hit hard." He points to
WorleyParsons
, down 14 per cent since the announcement of the tax; coal-seam gas specialist
WDS
, down 31 per cent;
Boart Longyear,
down 8 per cent, and
Downer EDI
, which also recently advised of cost overruns, down 39 per cent.

Although the falls can be partly attributed to general market weakness, the announcement of the 40 per cent RSPT on May 2 also contributed to the falls, Foulsham says.

Foulsham says many mining services companies have been hit harder than the overall sector, which is down only 3 per cent since the tax was proposed.

“Although the spotlight has been on the big mining companies, the service companies have been put under a lot more pressure," he says. “Mining services companies are reliant on new projects. When the tax was announced, the first thing the mining companies did was to review their projects and exploration, so there has been an impact from uncertainty and the unwillingness of big companies to spend until they know how much the tax will affect them."

Foulsham warns that small companies such as M
acmahon Holdings
and
Ausenco
may be hit harder than diversified players such as
Leighton
. For investors, he says, “in terms of stocks . . . it’s a classic contrarian play".

“It is a case of picking out quality stocks and seeing them as a long-term, not a short-term, play," he adds.

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Foulsham says WorleyParsons has had a fairly large drop in its share price, but over the long term it will be fine, creating a “decent" buying opportunity.

“It’s the same with Leightons – they have John Holland engineering, and in terms of area they are spread all over the world. That’s a quality stock and if you wanted it for the long term, now is a good time to pick it up," he says, adding stocks in the sector will benefit from any amendments to the proposed tax.

“Once there is more clarity you might see some of these companies make back ground, especially if amendments are favourable," he says.

Bell Potter senior industrial analyst, John O’Shea, specialising in the mining services segment, says the sector can be divided into companies that service construction of new projects and those providing services to up-and-running mines. He says there is greater uncertainty for those companies that are dependent on new projects going ahead.

“The mining companies will be just trying to maximise output and profitability of existing mines in the short term, and this results in strong demand for the products and services offered by companies such as Bradken and UGL," O’Shea says.

“Those at the construction and project development end are subject to the most uncertainty but in the medium to long term may provide the best value. Companies such as Ausenco, which derives most of its earnings offshore, is dependent on new projects and at the moment has seen some deferrals because of the GFC and other issues. [It] could provide an opportunity," he says.

Stan Shamu, Australian Stock Report resources analyst, says the sector has also been hit by a stuttering global economy. He says contract momentum has slowed recently, with the exception of companies developing liquefied natural gas assets.

“Our preference is United Group [
UGL
], which we think is good value and the safest play," says Shamu. It recently reaffirmed guidance and is enjoying contract momentum; it hasn’t reduced guidance as have others in the sector. Coal is one of its main areas of speciality so it hasn’t struggled as much as other companies, and it’s more diverse compared to some of its peers who focus on mining services," Shamu says.